Housing Step Down
At the most recent meeting of the Highland Park Neighborhood Association there was a conversation about housing; it is a frequent topic, as I assume it is in every neighborhood. In response to the notion of new housing someone asked the obvious question: “but who can afford the new housing?”. It is a genuine question; new housing is going to be expensive, whether it is an apartment, an Accessory Dwelling Unit, or a townhouse.
My neighborhood consists of four (4) census block groups with Median Household Incomes ranging between $39,423 and $73,462; or a weighted average of $52,298. The rule of affordability for housing used by the federal government is that a household should pay no more than 30% of gross income toward housing. Those costs include not only the rent or mortgage, but also utilities, maintenance, insurance, and taxes. Following this rule total affordable housing costs in Highland Park need to be between $985/mo and $1,836/mo; or an average of $1,307/mo.
Of the twenty three (23) units which have been available for rent so far this year [2024] fifteen (15) of those have a monthly rent above $1,300. All twenty three (23) units were higher than the low end for affordability of $985/mo; the least expensive unit was $1,215.
Only one of those twenty three (23) units are new; all the others are for pre-existing units. As with most neighborhoods, our neighborhood has added very little new housing over the previous decades.
So, who will be able to afford new housing if the current housing is already unaffordable? And why is this dilemma precisely why we should encourage the construction of new housing? That does not make intuitive sense. The answer is in who is coming. The competition for housing in Highland Park, and the city, is not only between existing residents, but everyone else who is moving, as well as existing households moving up the economic ladder. If a working-class household has a son or daughter who becomes licensed as a dentist [salary $100,000/yr - $200,000/yr] then that is a new higher income household, just as someone moving here from California.
And who is moving to Grand Rapids? The Housing Next study states: “the largest growth of renter households by income … is projected to be among households earning $100,000 or more annually”. This competition with higher income households is unavoidable. In fact, it is even desirable, as an economically dynamic city provides more opportunities to all households. I certainly do not want to return to the city or economy of the 1980s.
Step Down
Housing is a unique asset. Not only is it the highest cost item in most household budgets, it can be modified, and it cannot be moved. When housing is scarce, choices are few, and the goal can become to acquire anything. If housing is below the standard desired by the consumer, it can be upgraded.
Example Senario:
If two households are shopping for housing in an area, household A making $40,000/yr, household B making $160,000/yr, and only one property is available; the outcome of this competition is obvious. Even if that property is below what Household B would prefer; Household A loses out. This situation is called “Step Down”. Step Down is when higher income households purchase in a lower market tier due to limited availability.
The advantage to Household A from the construction of new market-rate [expensive] housing - which they cannot afford - is that Household B prefers that product and they no longer have to compete with the up-market household. This is good, someone looking for a home in Highland Park - making the average $52,298/yr - cannot compete with the Associate Veterinarian [salary $100,000/yr - $150,000/yr] moving here for her new job and proximity to the city’s many amenities. Nor can they compete with the Controls Engineer [salary $85,000/yr - $100,000/yr] moving here from the east side of the state to be nearer his wife’s family, The key to maintaining a neighborhood where all of these households can be neighbors is an abundance of housing options; a situation we can only achieve by building new and different types and tiers of housing.
Creation of new housing, which will naturally be at the higher end of the market, increases availability in the lower tiers of the market by providing options to the growing upper tiers of the market. Increasing availability in the lower tiers of the market in turn reduces the market advantage held by landlords. This has recently been validated by the city of Minneapolis where the rate of rent increase in the city has dropped below that of the overall state; this in an era when urban rents nation-wide are rising the fastest. Unfortunately, Minneapolis is one of the only American cities to take the housing crisis seriously. Yet the same effect can also be observed around the world in cities from Helsinki, Finland to Auckland, New Zealand.
Because of the malleability of housing - that it can be renovated and upgraded - and the fixed nature of housing - that it cannot be moved - the housing market is best thought of as a stack with each higher tier resting on the tiers below it. A consumer with the financial means always has the option to move down the market and then renovate an existing unit up into the desired tier, removing that unit from its previous tier. Constructing new units in those higher tiers helps to satisfy that demand while leaving the existing unit available in that lower tier.
I have my own story of “step down”. When my father died it left my mother living alone on a rural property. To move her into the city, nearer to family and services, I purchased a very affordable house in the Belknap neighborhood. This house had previously been a rental maintained to a safe and functional, but not particularly desirable, level. We proceeded to renovate this house, including a new kitchen. Purchasing and renovating this house solved a problem for my family, and we had the means to do so. It also removed this rental unit from the market, and if rented today it would be at a higher tier than previously, thus an example of “step down”.
Once the phenomenon of “step down” is understood, the chain of events by which new up-market housing alleviates, but does not solve, the housing affordability crisis is straight-forward. To ultimately solve the housing affordability crisis we will need to do many things, but it cannot be achieved without meeting the market demand at every tier, mitigating the need for households to step down.
-Adam Tauno Williams